Eq: Total Market
Now that many signs are pointing to an improving US economy, some investors think it is time to shift out of growth stocks and into more cyclical sectors. That said, cyclicals—which rely on consumer spending improvements—are going to be a hard place to invest because of the highly variable recovery path for different sectors created by COVID. With that in mind here are a few places to look: transportation (excluding airlines), such as the iShares Transportation ETF (IYT); or infrastructure, like the Global X Infrastructure Development ETF (PAVE); ecommerce and home entertainment, such as the Amplify Online Retail ETF (IBUY); or housing, either through single names like Home Depot and Lowe’s, or a broader homebuilders ETF like the SPDR S&P Homebuilders ETF (XHB).
FINSUM: We find homebuilding to be a very interesting opportunity. One of the reasons that the real estate market has held up is that homebuyers are typically those higher on the socio-economic ladder, whose incomes are much less likely to have taken a hit from the pandemic. Therefore, the growth trajectory for that whole sector looks strong.
The initial winners from the pandemic were sorted out long ago—FAAMG, Zoom etc. Investors are now trying to figure out who the winners will be over the potentially long next stage. The recovery may take several years and the economy is changing right before our eyes, so this is a time of great alpha capture if you can identify the next big trends. With that in mind, here are three stocks to look at: MercadoLibre, Ryan Air, and SAP. The first is like the Alibaba of Latin America. Their market cap is only $60bn versus Alibaba’s $800bn, and Latin America is roughly half the size of China (population-wise), so a $400 bn goal seems reasonable. It almost feels like investing in an early stage Amazon. Ryan Air is a best-of-breed European airline whose operating model and unit costs run circles around the competition. They will likely gain the most as airlines come back. Finally, SAP is a great cloud play. They are relatively new to the cloud game, but grew very quickly through acquisition, so as the market digests their new business line and WFH drives huge cloud growth, they should be in a position to benefit.
FINSUM: These seem like very refined and well-considered choices. MercadoLibre feels like the largest opportunity to us.
The market is falling again the day after the Labor Day holiday, and many tech stocks are nearing or in correction territory. It is a rough start to the week, and Goldman Sachs is not offering much hope. The firm published a research piece this weekend which was bullish on stocks overall, but said that another 10% correction may arrive soon. Goldman says that if investors start to doubt the trajectory of the recovery in the face of the super quick snapback in economic output that the market has priced, then stock prices will likely fall.
FINSUM: On the whole Goldman was pretty positive, but they also clearly allowed room for a short-term “shake out” in share prices. This correction we have on our hands might also lead to a change of market leadership, which would be an interesting shift.
Despite the volatility of the last couple of days, the markets actually got some good economic news today. As usual, the data is not perfect, but directionally, the unemployment numbers suggest the underlying economy is improving. The unemployment rate in August was 8.4%. That marks the first reading under 10% since before the pandemic. The economy added 1.4m jobs overall. The only fly in the ointment is that this is the third straight month that the number of jobs added has been falling, a sign that the recovery could be losing momentum.
FINSUM: The reality is we are not just going to immediately pop back to January 2020’s economy. The fact that well over a million jobs were added in a very tumultuous month is a good indication that the recovery is on track.
The Fed made some highly anticipated policy adjustments at the end of last week. This was not about short-term rate moves either, but rather about its long-term role in the recovery and how it plans to manage the economy. The biggest change seems rather small in wording. The Fed basically corrected its mandate to say that it would not automatically tighten policy just because employment had reached or exceeded what it consider to be “full employment”. In effect, this means that the Fed is ready, willing, able to let the economy run very hot for many years. Analysts think the Fed will likely not hike again until at least 2024.
FINSUM: So the Fed is going to be very accommodative for the next several years. It is starting to feel like equity valuations are going to have no choice but to rise as the Fed has taken “there is no alternative” to a never-before seen level for equities.
The wild market over the last four months has caused a lot of elation and anxiety among investors. It has also caused a rethink of what kind of recovery we may be experiencing. Almost everyone thought we would have a V- or U-shaped recovery, but the way things are shaking out, it looks like we may have a “k-shaped” recovery. What this means is that almost all companies took a big dive at the start of the pandemic. However, after that point the fortunes of certain sectors have diverged markedly, forming a “k” shape to the market recovery. IT, consumer discretionary, and communication services have been the big winners, while energy, financials, utilities, and real estate have suffered.
FINSUM: So the interesting question here is the degree to which the market recovery might end up mirroring the economy’s recovery. So far the patterns make sense.